Is Senator FitzGerald going to talk to himself? I will listen to him.
Corporation Tax Bill, 1975 (Certified Money Bill): Committee Stage (Resumed) and Final Stages.
Question proposed: "That section 127 stand part of the Bill."
I do not know how many people have availed of the Minister's offer to give an illustration of these section. In case there is anybody in the House who has not, it might lead to quicker disposal of this and other sections which remain if we were told what the meaning is where there is any change and confirming that there is no change where it is a mere transfer into the language of this Bill what are existing provisions of the law.
Section 127 is providing rules to deal, for capital gains purposes, with the case where, on a reconstruction or amalgamation, one company takes over the whole or part of the business of another company and that other company receives no consideration for the transfer of the business other than the taking over of its liabilities. The section provides that there will be no charge on the transferor company when it transfers its assets, but the transferee company will be treated as if it had acquired them at the time and at the price at which they were, in fact, acquired by the transferor company. Trading stock is excluded from the operation of the section.
This general approach would be in conformity with the approach in relation to the transfer of assets under the capital gains tax code where a charge to tax does not arise at the time of the actual transfer.
Question put and agreed to.
SECTION 128.
Question proposed: "That section 128 stand part of the Bill."
This section provides that, where the cost of reconstruction of any building and such like is met out of borrowed money, any interest on such money which the company has charged to capital is to be taken into account in computing the gain accruing to the company on the disposal of the building. Again, this is in conformity with the general capital gains tax principles.
In fact, it represents no change. If there is any change, it is an improvement.
Yes. We are recognising this for the purpose of the corporation tax.
Question put and agreed to.
SECTION 129.
Question proposed: "That section 129 stand part of the Bill."
This is another of these interpretation sections. It contains the interpretation provisions for the succeeding sections in this particular part of the Bill. It seems to me there is nothing which requires specific attention at the moment, but I would be glad to answer any queries which any Member may have.
Question put and agreed to.
SECTION 130.
Question proposed: "That section 130 stand part of the Bill."
This is the main relieving section. It provides that the disposal of a chargeable asset by one member of a group of companies to another member of the group will be deemed to be for consideration of such amount that neither a gain nor a loss accrues to the company making the disposal. Certain financial transactions are excluded, namely, a disposal which consists of paying off a debt or of redeeming shares, or which take the form of the disposal of an interest in shares on the occasion of a capital distribution. Where the consideration for disposal consists of compensation for damage to an asset, the disposal will be treated as being to the person who ultimately bears the burden.
Question put and agreed to.
SECTION 131.
Question proposed: "That section 131 stand part of the Bill."
This section applies to groups of companies and the general rules about appropriations to and from stock-in-trade which are contained in the Capital Gains Tax Act, 1975.
Question put and agreed to.
SECTION 132.
Question proposed: "That section 132 stand part of the Bill."
Again, we are applying the capital gains tax principles in relation to disposals or acquisition outside a group.
Question put and agreed to.
SECTION 133.
Question proposed: "That section 133 stand part of the Bill."
This section is concerned with the provisions in the capital gains tax legislation, "rollover" relief, which permit a trader to defer payment of tax on capital gains realised from the sale of business assets if the sale proceeds are spent in acquiring new assets of the same class for exclusive use in the business.
Question put and agreed to.
SECTION 134.
Question proposed: "That section 134 stand part of the Bill."
This is the section which empowers the Revenue to recover unpaid tax in respect of chargeable gains by assessing the principal member of the group or any member which owned the asset while a member of the group. It is a logical consequence to giving group relief. The corollary of that is the group liability.
Question put and agreed to.
SECTION 135.
Question proposed: "That section 135 stand part of the Bill."
This section is designed to prevent avoidance of tax by a company by manipulating the deferred gain provisions which were referred to in sections 130 and 133.
Question put and agreed to.
SECTION 136.
Question proposed: "That section 136 stand part of the Bill."
This section provides for an exception to section 135. That section is not to apply where a company leaves a group as part of a bona fide merger. There are two safeguards to prevent abuse. Firstly, the merger must be shown to have been for bona fide commercial reasons and without tax avoidance as a main object and, secondly, “merger” is fairly closely defined. To qualify as a merger, the arrangements must provide that a company leaves the group, that an interest in that company's business is acquired by an outside company or companies, and that an interest of equivalent value in the business, or the businesses of the acquiring company or companies, is acquired by a member or members of the original group. At least 25 per cent of the value of these interests must consist of ordinary shares and the remainder of shares or debentures.
Where does the benefit lie in not imposing the provisions of section 135 where there is a bona fide merger within the definition of this section? The tax charge does not arise in the manner proposed in section 135?
If there is a genuine merger.
What is the test of a bona fide merger? One of the attractions of acquiring a company might include the fact, for example, that it has a loss forward that could be utilised by the acquiring company. It could be a bona fide reason for an outside company to take it, and yet it might be coming into the country to carry on that business, bona fide in that sense and attracted to make the acquisition by the fact that there is a loss forward of £100,000 or £200,000, because the company being acquired would have that tax advantage. If it can be justified by the business that follows, at what stage do they know they are relieved of the provisions of section 135? We are aware of companies that are being kept in existence through Fóir Teoranta at present for the benefit of keeping employment up. I am thinking of one particular case where we are trying to tidy the company up so that another company with proper management and proper access to non-State capital will come and take it. Would that be regarded as a bona fide merger, even though there would be—as there is—a hell of a loss forward available in the company? It might be one of the reasons why they are prepared to pay anything to come into this situation. Some of these sections—the transfer of capital abroad provision, for example—catch you if any one of the elements of the operation consists of tax avoidance. This would make tax-free profits available. For example, you are taken as supplying the home market situation, where there is no question of export tax relief involved. They may be prepared to do this because they can, in that situation, by taking this company into its embrace and merging with it, make profits for some years with this loss forward availability. In fact, Fóir Teoranta would be cleared of a burden of further finance; employment would be maintained by the simple availability of the loss forward. Are there any circumstances in which this could be seen to fall within this section? Would it cease to be bona fide because it can be demonstrated right from the start, which would be true, that the company being acquired had a loss forward and that one of the elements in the negotiation to have it acquired was that this loss forward would mean they earned profits free for some years? I do not know whether the section drafted would take care of that case. I cannot name the company, but it is an industry which gives in its area quite substantial employment. It is being maintained by constant advances by Fóir Teoranta. It is hoped that if a capital reconstruction is done, the balance sheet tidied up, and certain shareholding rights removed, somebody will come in and will want, not to start a new company, but to merge its own business with this company and that one of the elements attracting it will be the tax free loss forward which would be available in that situation.
It is important to remember that we are dealing with the part of the Bill which deals with capital gains only, not with trading profits or loss. We are dealing here with the deferral of tax charge where transfers of property take place. In section 136 we are dealing with a merger situation where there would be a reciprocal exchange of shares between one company and another. We are not dealing with losses as such here. I could accept, of course, that maybe some of the factors which Senator FitzGerald has referred to would be observed by people who would be considering such a merger, but this would clearly determine the nature of the consideration and the extent of the consideration given by one company for an interest in another and so forth. But the principal test would be whether there were good commercial reasons for the merger. Some businessmen would, no doubt, look at the tax position in deciding whether or not the good commercial reasons were affected by the losses of the company or by any tax liability of the company but this section, deals only with the deferral of charge to capital gains tax.
A like situation can arise where capital loss could be made by disposal of the property of the company being taken over and which—I think I am correct in saying— is allowable against the taxable profits of the year in which the capital loss has been made. That is another situation where people could spend more money on a property development than it is now worth. A justification for somebody taking over the whole business would be that they could judge that straightaway they could make it a profitable business and that there was available the capital loss they would suffer in the realisation of this property. Again, we are talking about an employment generating situation and therefore we are concerned with the social purpose.
It is important to remember that what we are providing for here is that there would be no liability to payment of tax because it would be assumed that company B would be acquiring it at the price at which company A originally bought it. We are preserving a neutral situation. After the merger has taken place there might well be a disposal of the assets and there might be loss or gain at that stage. Then under capital gains tax principles the right to claim the loss or to pay tax on the gain would arise.
What the Minister is saying is that if it is found to be one of the elements that led to the bona fide merger there will be tax benefits, that it will not cease to be a bona fide merger for the purpose of this section.
Whatever else the Revenue Commissioners have I do not think they claim to have gifts of prophecy. They might anticipate——
I have a very well informed mind on this particular matter. I am thinking about two current cases.
Question put and agreed to.
SECTION 137.
Question proposed: "That section 137 stand part of the Bill."
This section counters a method of avoidance which is similar to that dealt with by section 135.
Question put and agreed to.
SECTION 138.
Question proposed: "That section 138 stand part of the Bill."
This section combats the switching of assets within a group to depreciate the value of shares in a company making the transfers. It is clearly a necessary anti-avoidance provision.
Question put and agreed to.
Section 139 agreed to.
SECTION 140.
Question proposed: "That section 140 stand part of the Bill."
This deals with the application and adaptation of enactments. It contains very little, if anything, that is new. It is the founding section for the Second Schedule and provides for the adaptation and application to corporation tax of certain provisions of the Income Tax Acts and the Capital Gains Tax Act, 1975.
Will we deal with this when we come to the Schedule?
Yes.
Question put and agreed to.
SECTION 141.
Question proposed: "That section 141 stand part of the Bill."
This is an adaptation of the existing law.
Is this current law? The hazards of people becoming secretaries of companies are increasing by the minute, if that is the existing law.
I should qualify my remarks. I was assuming too much. There is a strengthening of the obligation in relation to supplying information in respect of new companies. It has been found in practice, and I think some lay practitioners would support this view as well as the Revenue Commissioners, that the obligations in relation to supplying information on the formation of new companies are not being observed as well as they ought and it is considered that they should be strengthened so that the necessary information will be supplied.
Could the Minister help by referring me to the section which is being strengthened? One sometimes get instructions on the telephone from people in a foreign land to get them a company quickly. You proceed to do this and they give particulars of the general purpose of the company. If the person who gives you the instructions is a reputable person and has been introduced to you by somebody you know as being reputable. you do it. Then those people may forget about it for three months. If you have not dealt with the people before, you insist that your office will not be the registered office of the company. But you must get somebody in Ireland to act as secretary. Often that secretary is supplied by a firm of chartered accountant. If they have not made a choice of their accountancy firm yet —and under the law they do not have to—the solicitor may have to provide a member of his staff to act as secretary. Now under this section he or she may be liable to a penalty of £100 if he or she is unable to supply to the Revenue Commissioners the date of commencement of the trade profession or business.
The Revenue Commissioners know that many of the companies that have been formed remained in a state of inanimation throughout their entire life. Perhaps somebody had an idea and then found that, for one reason or another, it could not be financed, or that he could pursue his idea better in another country and so he does not commence business here at all. Perhaps he has not finally decided on the type of business he wishes to pursue. Such people may give you the general drift in the instructions you get when you are drawing up the objects clause of the company, but, as the Minister knows, that is not quite as burdensome a matter for lawyers as it was, because of the ease with which the objects clause of the memorandum and articles of association can now, under the 1963 Act, be changed. It can be done quite easily provided you know what they want it changed to. So you are not too worried if you have not given the Revenue Commissioners the precise objects to as full an extent as they may find they require before they can do things that are not ultra vires.
Where, in the existing Income Tax Acts, would I find out about a company liable to a penalty of £500? Thirty days seems an extraordinarily short period. Suppose you got a rich man who was thinking of coming over here, and somebody has told him despite what the Opposition has said, that tax-wise this would be a comfortable place to come to and then he disappears to the Bahamas or the Canaries, or he goes on a ski-ing holiday where no servant, least of all his solicitor, can disturb him. Is the position that there is an existing law which obliges a secretary to do these things? My experience in practice is that you get letters from the Revenue Commissioners and you get letters from the Registrar of Companies if you do not file the necessary particulars. Would the Minister direct me to the existing provisions?
The Senator need not open the book because I am going to make a public confession. When I was talking earlier I was thinking of the notices that practitioners receive from the companies' offices requiring them to furnish particulars and I have subconsciously put that into the taxation framework. There is no such obligation at present to notify the Revenue Commissioners. The Revenue Commissioners have found in practice that the absence of such a requirement has led to a most unsatisfactory situation from the revenue point of view. This matter was dealt with in paragraph 59 of the 1974 White Paper. I quote:
A provision to counter a particular abuse connected with the assessment and collection of taxes imposed on new companies would be included in the proposed legislation. The provision is designed to deal with difficulties which have arisen in tax offices in obtaining such information about some newly established companies as would enable assessments to be made and payment of tax secured in due time. Companies to an increasing extent have been taking advantage of this situation to obtain the use of moneys which should have been paid over to the Revenue. The abuse has at time been extended to PAYE and VAT by an omission to register for these taxes. There have been cases where companies, having for a time made profits in business, used the moneys which should have been paid in taxes in ventures which have been unsuccessful so that the companies have been forced into liquidation and recovery of the taxes has proved impossible.
The obligation to furnish the information is not within 30 days of incorporation but 30 days after the commencement to carry on a trade.
Senator FitzGerald is right in saying that in his experience companies can frequently be legally in existence and it may take quite an amount of time before all formalities are completed and the company actually commences to carry on a trade, profession or a business. However, once it has advanced to the stage of actually trading then it is appropriate that an obligation should exist to furnish the Revenue Commissioners with the particulars so that the Revenue Commissioners will then be on notice regarding the possibility of a tax liability arising, in the same way as a person, once that person commences to work, is under an obligation to furnish the Revenue Commissioners with the particulars which would enable the Commissioners to raise an income tax assessment.
I am entirely satisfied with that information. I had misread the section.
Could I ask the Minister if a new company will be so informed of this?
You are all presumed to know the law. Their lawyers and accountants will——
The overtaxed professions will have this duty and will be capable of being sued in negligence if they do not.
Question put and agreed to.
SECTION 142.
Question proposed: "That section 142 stand part of the Bill."
This section obliges a company, which has not made a return of its profits, to notify the inspector of taxes within 12 months from the end of an accounting period that it is chargeable to corporation tax for that period.
Question put and agreed to.
SECTION 143.
Question proposed: "That section 143 stand part of the Bill."
This section provides for the making of returns of profits, and, appropriately, for penalties in the event of non-return or incorrect return.
They represent a fair increase I imagine on this list——
Probably not enough.
No increase at all.
If the Senator was right I could increase them. This figure of £500 was fixed in 1963. Maybe the most appropriate thing would be to increase it. I will leave it as it stands for the moment as I am not disposed to make any more changes than are absolutely necessary at the moment.
In commenting on what the Minister has just said we should not make any increase of penalty in the cases of negligence but I would not have the slightest objection to his putting a very heavy tax on fraud. It is a very modest sum for somebody who could be engaged in fraud that would be extremely damaging to a lot of people.
Question put and agreed to.
SECTION 144.
Question proposed: "That section 144 stand part of the Bill."
This section is concerned with the making of assessments to corporation tax and the provisions are broadly similar to the provisions governing income tax assessments.
Question put and agreed to.
SECTION 145.
Question proposed: "That section 145 stand part of the Bill."
This is the usual kind of provision that enables the Collector General to have the power to collect tax.
Question put and agreed to.
SECTION 146.
Question proposed: "That section 146 stand part of the Bill."
This section provides that appeals against assessments to corporation tax shall be similar to appeals against assessments to income tax.
Question put and agreed to.
SECTION 147.
Question proposed: "That section 147 stand part of the Bill."
This section applies to corporation tax certain administrative provisions contained in the Income Tax Act, 1967, and subsequent legislation. We are simply applying what is there already.
Question put and agreed to.
SECTION 148.
Question proposed: "That section 148 stand part of the Bill."
This section which corresponds to sections 517 of the Income Tax Act, 1967, provides a time limit of three years for the institution of summary proceedings under the Income Tax Act, 1967, which is applied to corporation tax by section 147.
Question put and agreed to.
SECTION 149.
Question proposed: "That section 149 stand part of the Bill."
This section provides for penalties in cases of failure to supply certain information or where incorrect information has been given.
Question put and agreed to.
SECTION 150.
Question proposed: "That section 150 stand part of the Bill."
This section enables a property development company to postpone payment of corporation tax where the company's profits include a sum representing the value of the company's right to obtain a lease back of property which it has sold. There are corresponding provisions in relation to income tax are in section 23 of the Finance (Miscellaneous Provisions) Act, 1968.
This again represents no change.
No change.
Question put and agreed to.
SECTION 151.
Question proposed: "That section 151 stand part of the Bill."
This section regulates the time and manner in which Irish resident companies are to account for and pay income tax in respect of payments made after 5th April, 1976, from which income tax is deductible.
Could I on that section refer back to the one relevant to the question of loans? I draw the Minister's attention to the effect of the provisions of section 98 (6) where a 35 per cent rate of grossed-up income is paid where a loan is made to a company not engaged in the State and where the company which is making the loan has made profit from its export turnover. Perhaps it is wholly engaged in exports. It is a practice which exists in many cases, for example the United States, where there is no matching credit given for export tax relief for the company.
In some situations, which the Minister I know is aware of, they choose, because of the size of the profits they make, to lend them to their parents who are so organised by location to avoid the provisions of American tax. They lend on to the Minister himself. The Minister issues to the lending company a bond which, being held by a person neither domiciled nor resident in Ireland, receives their income free of tax. For the purpose of that company being able to make that loan, their subsidiary must lend them the money out of their profits. Under section 98 (6), the loan made by the export tax relief company to the parent, which then intends to lend it on to the Minister in these circumstances and conditions, will now have to pay income tax grossed-up 35 per cent of the loan. That is one type of case.
Another type arises only in the case of foreign companies who have been attracted here and want to avoid the absence of matching relief. It is all right in Canada but not in the United States. This is called, "tax bearing". What many of these do is lend on to other subsidiaries they have around the world. In all these cases, unless they declare a dividend which gets caught for taxation, they have to put the money in a bank. The point is that they will not be making these loans. They will not pay the 35 per cent. It is a burden which we never told them they were going to have to carry. They were told that all their exports would be relieved from tax. They came in on that basis and they regard this as—it was not intended I am quite sure—a departure from the assurances and undertakings given to them.
One whisper of any departure from a promise to provide taxation relief to companies such as those in Shannon which came here because of export tax relief would get around so quickly that it would be difficult to calculate the potential loss in decisions made not to go to that country having regard to that position.
The same criticism can be made with regard to the issue of securities to a company not resident in the State. This word "security" has been given a very extended meaning. I take the Minister's point. He wants to avoid the Irish tax not being collected by the UK parent as the case may be. The danger is what I say. The simplest way of coping with it is to introduce in Part IV and Part V, or to introduce in this section, that the provisions of 84 (2) (d) (iv) and the provisions of 98 (6) shall not apply to the companies within these parts. The surcharge which is to arise in certain circumstances also should not apply to these. Having been accused by somebody because of this special pleading, may I say I enjoy no export tax relief of any kind.
I would love to have the assistance of a written statement of what Senator FitzGerald has just said. I would certainly like time to think about it. In many cases the practical position would be that the parent company would not itself be a close company.
The great majority of these companies are close companies because they are resident in Ireland and we do not want them to cease to reside in Ireland.
They may be subsidiaries of open companies, and that therefore would not make them controlled companies here, if they are subsidiaries of companies which are not themselves close companies.
I know of many which are not ultimately held as such.
You are talking about the parent company.
I am talking about the parent company. We got out of this problem rather neatly in the wealth tax where there was a trader in the background. That would not get us out of this one because there will be trading companies behind them all right. There are some of them close companies, but I would say the great majority of them are not. I am thinking of one particular group which I am told is worth £200 million. It is private and has a substantial industry in Ireland.
I will certainly study the problem which Senator FitzGerald has put to me. I trust he will excuse me if I do not give him a detailed reply now. If any problem arises we will make the necessary adjustments in the law.
Question put and agreed to.
SECTION 152.
Question proposed: "That section 152 stand part of the Bill."
This section applies certain provisions of the Income Tax Act to the charge, assessment, collection and recovery of the tax under section 151.
Question put and agreed to.
SECTION 153.
Question proposed: "That section 153 stand part of the Bill."
This simply enables the Revenue Commissioners to use any information which they may have lawfully acquired for another purpose for the purpose of corporation tax.
Whether they have it lawfully or not they seem to be able to do it.
We are not doing anything unlawful.
Has had or have had or may have lawful access for the purpose.
If they have it lawfully, I am sure nobody would doubt that they should be enabled to use such a prevention and we are not proposing to——
Information which has been unlawfully acquired, but I hope a practice that once existed has been long since abandoned.
Question put and agreed to.
SECTION 154.
Question proposed: "That section 154 stand part of the Bill."
This defines a secretary for the purpose of this Part of the Bill.
I am not clear on the penalty provisions. It is perfectly clear that the secretary of a company should be responsible. Very often one does not know who the agent is for the purposes of the Income Tax Acts where one has a representative of the company. Members of my own profession take care never to become agents of foreign companies so that assessments cannot be made on them.
The Revenue Commissioners may not of their own volition impose any fines. They have to take proceedings against defaulting persons, and this enables persons against whom proceedings are brought to enter a defence. In practice the income tax provisions impose little hardship, and I see no hardship in cases where people have good and sufficient reason for not complying with the requirement. Where there is wilful fault it is only right that the Revenue Commissioners should have power to proceed against persons. Otherwise we would be passing a law which would simply melt in the hands and the Revenue Commissioners would not be capable of administration and of taking the proceedings. The Revenue Commissioners have to be in a position to name the person responsible. The person to that extent would have to be identifiable and identified to the Revenue Commissioners before any question of a penalty could arise, and if the status of the person was established at that stage then clearly the person in question would have ample opportunity to amend his or her hand.
The Minister has used a phrase which would be lovely if it could be somewhere in the Bill: "wilful default". I am thinking of the poor slob who is selling anything you like to think of around the country and doing it from a branch and has never heard of section 154 and knows nothing about it. Under these penalty provisions he gets caught. It is easy enough to discharge the obligation by forming a new company. There will probably be some ritual giving the information.
However, the setting up of a branch does not happen all that often. A branch may be found to be there in circumstances that nobody thought too much about it. There may not be access in that situation to the kind of advice that would mean that the fellow really knew his obligations. Are you going to tell me that the Revenue Commissioners would be kindness itself in all these circumstnces? They have to apply the statute, have they not?
Yes, but the right which the Revenue Commissioners have to issue proceedings to have penalties applied does not impose on them in all cases an obligation to bring such proceedings in the event of default. Similar provisions have existed so far as the Income Tax Acts are concerned. I am not aware that any particular difficulties, even to defaulting taxpayers or their representatives, has arisen under existing legislation. The Revenue Commissioners are extremely busy people with a tremendous load of work on them. They are not disposed to rush into litigation and to seek the imposition of penalties by the court.
Difficulties could arise in the kind of cases that Senator FitzGerald refers to, but the usual practice of the Revenue Commissioners is to afford such persons, when identified, a reasonable time to mend their hand and in the event of failure to make amends. Then the proceedings are resorted to. I am sure that the Senator knows that it is not unusual for the courts, even if proceedings are brought, to allow the person against whom the proceedings are brought a certain amount of time to put matters right before making a decision as to what penalty should be applied.
Question put and agreed to.
SECTION 155.
Question proposed: "That section 155 stand part of the Bill."
Section 155 contains definitions of certain words and expressions which are used throughout the Bill. Reference has already been made to it, and queries have been raised why everything is not in this section and why we had definitions elsewhere. I trust that as we have gone through the separate Parts Senators may have seen the need for having definitions in the Parts of the Bill to which the definitions specially referred.
Question put and agreed to.
SECTION 156.
Question proposed: "That section 156 stand part of the Bill."
This section defines subsidiaries and provides rules for determining the amount of share capital of one company which is owned by another when that other does not directly own the share capital of the first company.
Question put and agreed to.
SECTION 157.
Question proposed: "That section 157 stand part of the Bill."
This section contains rules for determining whether a person is connected with another. All the provisions are self-explanatory.
What is a "relative"? Is the definition not different in the Capital Acquisitions Bill?
There are different degrees of relationship in the Capital Acquisitions Bill. Offhand now I cannot recall that a "relative" as such is defined. I think not, but each different degree of relationship is dealt with.
Is it connected with an individual? If, for example, A is connected with his brother and his brother is connected with his wife, is A connected with B's wife?
No.
Forgive me.
That is not included as a relationship; so unless it is included as a relationship it is not a relationship.
All one would have to do is to get the spouses of the children—none of whom would be connected with each other —to own all the shares. Perhaps I should pass on quickly from this.
They could be connected by other means.
If a person has five children, all boys, and they marry five different girls who are not related. Mr. A. and Mrs. A. are related; Mr. B. and Mrs. B. are related but Mrs B is not related to Mrs A.
Just take M. as the common parent and M has a son called A who is married to V and there is another son called B who is married to W.M is connected to V because V is the husband of a relative of M.M. is connected to W. A person is connected with an individual if that person is the individual's husband or is a relative or the husband or wife of a relative. W is the wife of B who is M's son.
Let M and the five boys stay out of the picture and the five girls remain who are not connected with each other.
No, they are not.
Question put and agreed to.
SECTION 158.
Question proposed: "That section 158 stand part of the Bill."
This section provides for the purposes of and subject to the provisions of the Corporation Tax Acts which apply it as a definition of "control" and this is similar to that contained in the Income Tax Act, 1967.
It must be written; there is no control in an oral option?
The Revenue Commissioners deal with facts and all facts are not adduced in writing.
Question put and agreed to.
SECTION 159.
Question proposed: "That section 159 stand part of the Bill."
This is concerned with the case where, by virtue of section 36 of the Capital Gains Tax, 1975, a resident company is liable for tax on a share of a chargeable gain accruing to a non-resident company in which it is a shareholder and the tax is actually paid by the non-resident company. The section provides that in such a case the payment of tax by the non-resident company is not to be regarded for the purpose of corporation tax as a payment to the resident company.
Is that meant to be in relief?
Yes. There is a similar provision in the Capital Gains Tax Acts.
Question put and agreed to.
SECTION 160.
Question proposed: "That section 160 stand part of the Bill."
This section ensures that where a non-resident individual claims under section 153 (2) of the Income Tax Act, 1967, a proportion of the personal allowances, he will be entitled to a tax credit, by virtue of section 83, will be chargeable in respect of the aggregate of the distribution and the tax credit in a similar manner to a resident shareholder.
Question put and agreed to.
SECTION 161.
Question proposed: "That section 161 stand part of the Bill."
This section empowers an inspector to make any necessary assessments to correct an erroneous set-off or payment of tax credit.
Question put and agreed to.
SECTION 162.
Question proposed: "That section 162 stand part of the Bill."
This section is designed to counter avoidance of tax arising from the diversion into close companies of income—usually income arising from professional activities— which would otherwise attract income tax at the higher rate. The device consists in the setting up of a company for the purpose of carrying on a profession, providing professional services or holding an office or employment. It may also take the form of the setting up of a company, controlled by persons engaged in a profession, and so on, for the purpose of carrying on a business of providing services or facilities for those persons. The profits of the company are withheld from distribution and therefore bear tax at the company tax rate rather than at the personal tax rates to which the profits, if distributed, would be liable in the hands of the shareholders. As these shareholders will usually be liable at rates of personal tax which exceed the company tax rate the non-distribution results in loss of tax revenue. The section counters this method of tax avoidance by imposing a surcharge of 20 per cent on the company's undistributed income similar to that imposed by section 101 on the undistributed investment or estate income of close companies.
The effective rate of charge following the amendment we made to this in the Dáil is 58 per cent on such undistributed profits. I gave the House on the Second Stage some information in relation to the manner in which the existing provisions were being used so as to avoid liability to tax. I drew attention to the fact that there are several professional and service operations using the device of service companies so as to avoid their due liability to tax. In the cases to which I referred most of the people involved would be people who would be liable in the absence of such devices to pay tax at the rate of 77 per cent but by the operation of certain devices which we seek to curtail in section 162 would be liable to a higher rate of tax in future than they have been in the past but still not liable to tax at the full rate of 77 per cent.
A considerable number of representations have been made to me in connection with the proposals in the Bill and the case has been made that a large number of professional organisations need substantial capital in order to maintain their present rate of activities and indeed to provide for future expansion. I have accepted the validity of those representations to the extent of putting down an amendment in the Dáil on the Committee Stage which reduced the impact of the Bill as originally introduced. Since then I have received further representations asking for further concessions. As I have already stated in relation to section 101, any further concessions on this front would necessitate a restructuring of the whole approach and the adoption, instead of the approach which we have used in this Bill, of the United Kingdom provision which would involve looking right through all these service companies to the ultimate beneficiaries; in which case the actual rate of tax would be, in many cases, 77 per cent and not the 58 per cent which is proposed in the Bill. By and large, what we have proposed meets many of the representations already made.
I accept that the capital requirements of the professions can vary depending upon the nature of the professions, on the ratio between personnel and principals. They can also vary according to the economic climate. Sometimes it is easier to get payment of professional fees than at others. By and large, a situation such as we now envisage in the Bill, which enables the company to withhold 20 per cent of its distributable profits, is a reasonable contribution to make towards the financing problems of incorporated service companies. I would again remind the House that we are endeavouring to achieve equity between two sets of taxpayers, one, professional people who conduct their business as individuals and who by so doing make themselves liable to the full rate of tax, up to 77 per cent, and persons who conduct similar businesses but do so through incorporated bodies.
Clearly, as between these two groups of persons there are no reasons why one should enjoy the benefit of more favourable treatment than the other. As I said on Second Stage, it may well be that there is a case for treating all the same and giving them all the sort of treatment which has been urged by all the representations I have received. Were that to happen it would create a further anomaly by giving preferential treatment to certain professions which would not be available to other sections of the community whose capital requirements would be at least as substantial as persons engaged in professional activities.
It is difficult to strike a balance here which would satisfy everybody. What we have done in the Bill is as reasonable a way of dealing with the problem as any alternative suggestion which I have received. I again emphasise that if the alternative method is to be introduced then we shall have to introduce along with it all the complex apportionment provisions which exist in the British system. We will also have to confer on the Revenue Commissioners the right and obligation of making a judgment as to what are the capital requirements of each and every profession seeking the treatment which it has been urged should be given to professions in order to meet their capital requirements.
I would expect that such a system would generate as much argument and hostility and dissatisfaction as anything which might emerge as a result of the application of section 162 as at present in the Bill.
I am looking for enlightenment on this point rather than wishing to make a point myself. What I have to say is rather oblique to the rather technical point which the Minister has been making. According to the Constitution no act is illegal or can be made illegal unless it was illegal at the time of its commission. This involves a large reverberation of the entire Bill. As we move through these sections, and particularly on to this section, it can be seen that a mechanism has been devised by which certain forms of avoidance or evasion can be closed off. These are forms of avoidance or evasion which in the past have been used. Is there any sense in which this will act retrospectively? If one adverts in passing to section 160 where certain reliefs are retrospectively given. Is there any sense in which this, or any other section, will in fact retrospectively make certain procedures illegal?
No. I can state that very definitely.
As the Minister and the House know I am totally opposed to this section. I could not under any circumstances vote for it if the matter reached that stage. I do not think the Minister has given his mind freely to the representations that have been made to him on behalf of a number of highly respected professions. He has already closed his mind. He is discriminating between businesses. He is meting out one type of tax to participators in one business and a different type of tax to participators in another business. I guess that the reason why the Minister made what I think was the right decision with regard to tax avoidance for ordinary trading companies was the administrative convenience of avoiding inspectors of taxes all over the country having to make value judgments with regard to a whole host of trading companies.
If the position is—and I fully accept what the Minister has told us—that a number of people were managing to get out of their companies, money on which they did not have to pay tax, he made a right decision about that. That was an abuse and it was right to stop it. But he has I believe already effectively done so by taxing capital gains and the earlier provisions of this Bill with regard to closed companies. The Minister is aware that I have seen all the representations that have been made to him. One proposal was to insert a new paragraph between lines 58 and 59:
For the purposes of this section the income of a company for an accounting period shall not be regarded as distributable unless it can be distributed without prejudice to the requirements of the company's business.
There are only a few professions that can be incorporate at all. It is not possible to incorporate as a solicitor nor as a barrister nor as a doctor. But in all cases where capital is required—and there are certain professions where more capital is required —it is not possible to expand if the tax rate is to be what is proposed by the Minister.
Fifty per cent may just about enable a company to retain enough profit in a professional company to expand. I do not know the position about all these corporations. All I do know is that there are not many of them. No great administrative burden will be imposed in discovering whether any of them are retaining profit beyond the needs of their business. The Minister has rightly referred to the cyclical nature of particular professionals. It is well known, for example, that in the case of architects, engineers and surveyors their whole position depends upon the rate of growth or state of decline of the building business. If they cannot retain profit at 50 per cent during the boom years, they do not have any income in the bad years? They must keep together a team and pay them so that they will be ready for the boom.
The Minister may have found some professional companies—most, if indeed, not all of which he has captured by his anti-avoidance measures which I wholly support in regard to close companies—in such a position that they will not be caught as much as he would like to catch them, where there has been an unnecessary retention of money, which will not generate more rental or estate income than the company in question will distribute. The Minister may have found some cases of that kind. I am not arguing for these cases. Let him have a special provision to deal with people who have been abusing the position. If it involves value judgments by the Revenue Commissioners, so be it. In the process they will get themselves informed about the problem.
These professional firms provide a great deal of service to the community. The Minister referred to various sections of the Bill before the House. Who does the Minister think explains these provisions to people who are thinking of starting an industry here and giving employment—the very firms who need the money to maintain and educate their staffs? That is an important element. Within my own profession they cannot incorporate and, if you are at a particular level of activity, and you employ a number of people, you have to have a service company through which some of the profit is retained. We find that even qualified solicitors whom we have to pay are not generating from their activities for a considerable period of time as much as they are being paid. That is a necessary part of their education. The same is certainly true of chartered accountants. Many in that profession and, indeed, some firms of solicitors too go on to provide a service by activity in industry and commerce.
If the Minister will not accept the amendment which has been offered to him without the apportionment of income consequent on trying to retain more than is accepted, I say introduce the apportionment provisions in the cases of these companies, though I do not see why the general judgement which is being made and accepted by the Minister that industry in general is not retaining more than it should, should be found not to be true of certain professional practice. A rough estimate of the situation, as far as my own experience goes, is that they need at least the retention of the entire of the pre-tax profit of one year as capital in their concern. I challenge the Minister to produce a sufficient number of cases where this is in a cash form. Some of it may be in a cash form because, for example, they know there is something coming on the market which is going to be absolutely suitable to meet their space requirements.
If we have the Revenue Commissioners so empowered let them decide whether any company in that position does not need the cash to cover the situation if it is in one of the cyclical professions where it drops down or where it is an expanding concern where it needs it to finance the increased need for working capital. At some stage in the course of the argument on this matter the point was made: why do the professionals not collect their fees more quickly? I would ask the Revenue Commissioners through the Minister how easy have they found it to collect their fees and they do not have to preserve goodwill? They long since abandoned any desire to have that. Year after year their provisions for exacting payment have become stiffer. They know from their own experience that it is difficult to collect money which is due.
If you are trying to carry on a professional practice, you do not sue for the recovery of your fees except when utterly and completely provoked. For example, you are doing a case where the only fee that you will ever get depends on the client winning the case and he can then pay your costs. It might take two years' work and you are taking a chance that he may never pay you at all. Is that to be pared out, that kind of service which is made available? There are lots of commercial companies that need much less capital than many professional companies or service companies associated with the profession. Professional firms do not get any particular credit terms for whatever is needed. They have to pay their staff weekly, monthly or whatever it may be. They may have to wait for years literally, for fees.
I am obviously disclosing an interest in the matter, though nothing like the interest which is involved for some firms. Again, for engineers, surveyors and architects, who are their main debtors? Against whom do they have to make the claim? It is the State that is the slow payer of these professions. What kind of goodwill is an engineer or an architect going to have in a Department if he starts suing them for the fee? I think the thing is wholly unjust. It is like finding that somebody has committed a murder on the road and if we had capital punishment, you would decide to execute all the other residents. This section should be the subject of a full inquiry before it is enacted.
In so far as the surcharge affects companies which were incorporated in response to some of the Minister's own amendments made in the law encouraging invention in Ireland, it is also enacting a tax which is not a corporation tax. It is a surcharge on the profits made by people who were told that if they did make these profits they would have them free of taxation. There is, and the Minister knows it, discrimination which should be eliminated, the discrimination between the individual trader and the one who incorporates himself; the individual solicitor who does not think of the idea or have use for a service company. There is discrimination between the treatment of two people in partnership, or ten people in partnership, who do not have a service company and those who do. A way of correcting the matter is to give the benefits related to the requirements of these businesses, whether their business is carried on individually or in partnership or through a corporate form, in so far as capital is required. If that involves value judgments made by the Revenue and if that creates an administrative burden, I am sorry. That burden must be placed on them if there remains something not already caught by the provisions with regard to distributions by close companies.
I would have thought that the Minister had made an absolutely correct decision in the way he decided to treat close companies other than those affected by this section. His general assumption is that the trading profits, particularly in inflationary circumstances, made by Irish companies are required to be ploughed back for the most part and that there is not excessive retention. That is a correct decision. There should be very substantial evidence available. Speaking from my certain knowledge, all professional people that I know want the use of their money if they could get it. You cannot spend a typewriter. You must buy that out of after tax profits. You cannot spend your law library. You cannot spend all the modern type of photostatic machinery which you must have in a professional practice.
Is it assumed that our position, the position of professional people, is in some way better than a man who can make perhaps twice the money through hardly having an office at all, an agent who makes splendid commission from his imported goods and makes it in the corporate from and is caught only to the extent that he is in precisely the same position as any professional person who is retaining excessively? But he is treated differently. He may have no capital investment at all and he is not on risk in the manner in which professional people are at risk.
There has been a very wide extension of the principle of the law relative to liability for professional negligence and actions against professional people are very frequent. The Minister can say in reply that you can insure against it. Yes, but when you renew your insurance after you have been caught where is the obligation on the insurers to renew it? And with the ever-increasing complexity of new legislation, to take the legal profession, it is awkward and difficult to avoid not being negligent occasionally, not knowing what some judge will say reasonably ought to be your knowledge. It is one of the reasons why people have been forced to amalgamate so that they can pool their skills, specialise their talents, modernise their practices and lessen the risk of being wrong in the advice they give.
I suggest to the Minister that for these and other reasons that have been offered to him in the representations that have been made to him, he should accept the proposal that the income should not be regarded as distributable unless it can be distributed without prejudice to the requirement of a company's business. If the Minister tells me that, he cannot do that without apportionment provisions. For myself personally, I would say to him to let us have apportionment provisions. All I want is to protect the man who is not just simply after the money and wants to improve the skills with which he is trying to serve the public. This measure will seriously damage the quality, apart from being extremely depressing from the point of view of the attitude shown by the Revenue and the State to these professional bodies, and failing to note that they are all sorts of limitations on their ability to make the quick penny. Most good professional people are downrated by their colleagues to the extent that they are interested in money. That has been my experience. They get a rating that does not do them good. The normal professional man is rated according to the fact that he is not interested in a quick profit, that he is interested in the satisfaction he gets from doing the job, solving the puzzle or the problem, as the case may be.
I have been given various illustrations and examples—and I am prepared to hand them to the Minister— where the effect of this proposal could lead to a taxation rate overall of much more than 77 per cent which is the highest rate of what was surtax payable. They have been handed to me since the debate on this Bill started this afternoon and I have had no way of digesting them or examining them, but I am extremely unhappy about it.
There is another point which the Minister may have overlooked. As regards value-added tax, have the Revenue Commissioners considered that there are some professions, because of the nature of their clients, who do not charge value-added tax, solicitors being in the lead? A solicitor's firm that does not charge VAT to its clients, when it is paying its service company has to pay value-added tax on the gross sum paid to the service company. So, between corporation tax, value-added tax and surcharge, if this goes through you are nearly in the position where you either, if you can, raise your fees or reduce your staff.
I do not want to exaggerate this in any way but what is needed is to equalise the position of people who are in business generally, whatever form they are in, so that nobody is in the position where he is not using the money for consumption purposes or paying more than the 50 per cent corporate tax. If he needs for personal living something that brings him within the 77 per cent range, he is caught by the closed company provisions anyhow and he would be within that range and he will only escape to the extent that he ploughs back. If he is trying to dodge tax by some method of leaving cash unutilised so that it does not generate deposit interest, if the suggestion I make to the Minister is acceptable, in due course he will get the modern UK equivalent of the old surcharge direction that will be an apportionment.
I am speaking on this point for myself alone. It would be the course I would adopt if I were Minister for Finance. I would not apply it over the whole range: I would apply it so that administratively it could be easily worked. In the number of corporate bodies we have been talking about there are only a few professions involved that need to have their accounts examined. I know it would take time and goodwill but I would suggest to the Minister at this stage to withdraw this section and work out a suitable alternative to cope with any situation.
Why professions should be selected for special treatment I do not know but if there is some feeling about professions let it be tried on them as on the dog. There should be a new section in the Finance Bill to allow these companies to continue with their 50 per cent profit and to retain the after-tax profit which is justified by the companies' need for expansion. It is not needed for expansion. It is also needed because inflation is increasing the cost of the burden of working capital and there is no provision for relief. I do not know who abused the previous system but nothing can be done about them retrospectively. They cannot abuse the system any more. But if there is excessive retention with the view to deferring tax, then there should be a section in the Finance Bill of the kind I outlined.
There is also the element of imposing a surcharge where companies thought they were going to make their incomes eligible for export tax relief. Incidentally, I would recommend to the Minister the consideration of the National Prices Commission's report, published in January, 1975, on professional fees in the building industry. They did not find them excessive.
The Minister has been litening very carefully to what Senator FitzGerald said about professional people. I heard Senator FitzGerald speak on this on Second Reading. He was not quite so expansive in his treatment of it then as he was now, but the quality of sincerity and commitment to his point of view has not altered; it has intensified, if anything.
The request to withdraw this section should not be taken in any sense a reflection on the extraordinary work that has gone into the creation of the entire Bill. It is a masterpiece and a monument to the civil servants who drew it up and to the draftsmen who put their creative energies into it. That is the point that Senator FitzGerald is striking at here. It is quite clear that the necessity for this Bill has been the result of years and years of neglect. Free enterprise societies like America have had their gift taxes, their corporation taxes, capital gains and acquisitions taxes down through the years. Obviously, in a section like this the Minister is closing in on too many fronts upon these professional classes. In a way it could almost be taken to be a victimisation of creativity. It seems to me that the really good firm, the committed firm, the firm that wants to expand and improve and refine its activities, is the firm that will be most penalised by this section. Having listened to Senator FitzGerald twice on this subject, I am convinced of the justice of the point he is putting and I urge the Minister to consider finding other means of achieving the end aimed at in section 162.
I am satisfied that unless the Minister had evidence that these close professional service companies were causing serious loss of revenue to the State he would not have introduced this provision into the Bill. I do not believe that the Minister or his advisers would have acted thus unless there was a serious loophole in the present legislation. Otherwise, the Minister would be acting very irresponsibly and very unfairly. The best way of dealing with this problem would be not to penalise all firms equally, as the Minister would appear to have done, although he has undoubtedly given a concession following on the representations made to him in the Dáil, but I would rather see him standing by his guns as regards the companies that are obviously created to avoid tax and treating the other genuine service companies fairly and equitably on the same basis as any other trading company. The Minister has said that this would present difficulties but he should face up to these difficulties and try the process of apportionment even though it might cause a good deal of extra paper work for the Revenue Commissioners rather than cause injustice to any genuine companies.
Yesterday Senators from both sides of the House spoke in favour of certain types of professional service companies. The engineering service was specifically mentioned and the Minister was helpful and receptive and generous in his interpretation of the words "civil or engineering services". I do not know what effect section 162 has in regard to engineering services where they got special export tax relief to encourage them to operate outside this country. We are living in an age of increasing service-type companies. Almost any business with problems will consider employing a consultancy firm. I have mixed views on the value of consultancy firms because we have had unfortunate experiences with some of these alleged consultancy firms who approached business people and for very large fees told them what they already knew and if they did not know that they should not be in business at all. Certainly some of them did not survive in business anyway. But there is an expanding use of the professional service company and we should encourage rather than discourage this type of growth. Like any other business, a service company must have adequate funds in reserve if for no other reason than to take advantage of expanding opportunities. I would hate to think that any form of discrimination would have a retrogressive effect by discouraging the right type of professional service company to expand and others to set up.
I do not propose to suggest how the Minister can resolve this dilemma. He has indicated that he has fairly well stuck his feet in in regard to it. I know that he is anxious and I think everybody in this House is anxious to have this legislation through both Houses of the Oireachtas and into law as quickly as possible, but as Senator FitzGerald said, I think that this whole matter is worthy of deeper consideration and even if it does, as I have said, entail extra work on behalf of the Revenue Commissioners and, indeed, the professions themselves, I would rather see a more cumbersome method of dealing vigorously with the obvious avoiders of legitimate taxation and dealing fairly with the genuine professional service firms. This may entail a change in the method but I would rather see the change because I think in the long run it would benefit the professions involved, discourage the obvious side-trackers of legitimate tax and in the long run be of benefit to the country as a whole.
Earlier I mentioned a number of professions which have engaged in tax avoidance practices which, of course, the law permitted and would continue to permit until what is regarded as undesirable practices were prohibited, and necessarily the reports of this debate in the newspapers were abbreviated which gave the impression that I seemed to be listing as the principal operators of these avoidance practices the medical profession. I understand that in some radio interview, the adjective "many" was used more than once.
Senator Russell is right in saying that, of course, he assumes that the Revenue Commissioners have furnished me with information which gives reasons for believing that avoidance practices have been engaged in and that they are becoming more widespread. That is so, but I should like to put on record and, I would appreciate if it could be published elsewhere, that I was not saying that many members of the medical profession were engaged in the avoidance practice, nor was I saying that I regarded the medical profession as being the principal operators of the avoidance practices.
First of all, let us get this thing clear. One, avoidance is legitimate, the law permits it, but if legislators become aware that certain practices are being used which frustrate the intention of the Legislature they have a clear obligation to correct what they consider to be an abuse, particularly if it is available to people of substantial means and knowledge but not available to the general body of taxpayers.
Secondly, I want to say that the information given to me leads one to believe that the practice has been used by a number of auctioneering firms, by estate agents and valuers, by property surveyors, by some architectural and stockbroking firms and by some engineering firms, and also by some chartered accountant firms. I want to emphasise that the information given to me does not justify the use of the adjective "many" for any of these particular firms, but the number of cases quoted to me is sufficient to justify me asking Oireachtas Éireann to amend the law so as to prevent the avoidance practices becoming more frequently used and also oblige me to ask for a change in the law which would ensure that as far as possible people of similar incomes pay similar amounts of tax.
I am anxious to have regard to and it is my intention, it has always been my intention, to have regard to the need to permit firms which require capital for the continuation of their activities and for the expansion of their activities to be able to retain profits to provide them with the necessary capital. Most business activities in Ireland are funded by retained profits not by borrowed money and this I think is not surprising having regard to the scale of activities in our society.
But I want to emphasise that the proposal I have made in this Bill would limit the corporation tax on withheld profits to 50 per cent. If I accept the representations being made that instead of having the surcharge on retained profits we should allow the Revenue Commissioners to make a value judgment as to what profits are necessary for retention, this will inevitably involve introducing apportionment provisions and charging at the full rate of income tax such portions of retained profits as are not necessary for the purpose of the business, and this could well result in there being a higher tax charge on several individuals and firms that will apply to them by virtue of the provisions of this Bill. Before I would move an amendment or accept an amendment to achieve that result it would be desirable to afford people who might be affected on opportunity of considering their position.
Senators FitzGerald and Russell in particular have argued in favour of a change in the system. They take the view, and I think it is a reasonable one, that the introduction of a code would require value judgment and which would involve apportionment might be fairer in that it would allow the people who legitimately need to retain profits to retain them for the necessary purposes of the business but would charge at the full appropriate rates those who withheld profits where it was unnecessary. I should, therefore, like to make this proposition and invite Senators to respond to it.
It is that we would consider introducing a provision in the 1977 Finance Bill, which would be operative from the 6th April, 1976, to replace the surcharge provision such as I proposed in this Bill, with a system which would allow the Revenue Commissioners to make a judgment as to what profits it was necessary to retain for the purpose of conducting a business and would also empower them to apportion and to charge at the full rate of income tax all profits which were withheld where this was not necessary for the conduct of a business.
If such an amendment is to be made, it will have to apply across the board. It would, I think, be indefensible to apply the judgement and apportionment provisions to professional and service companies and not apply them to the trading activities which are separately dealt with in this Bill. The line between a professional company and a trading company is sometimes very difficult to discern. Senator FitzGerald made this point and it is true. Therefore, if we did not treat them in an identical way and we were exposing some to the full rates of tax at 77 per cent, then I think there would be grounds for legitimate grievance. So I would ask Senators to consider that proposition.
Before I conclude I should like to give some details of the kind of avoidance practices which we are seeking to close. Some of these, as Senator FitzGerald acknowledged, have been closed or curtailed by other provisions in this Bill and indeed by provisions in the capital gains tax legislation and so forth. But not all. I am certain that, skilled and ingenious as have been my advisers and draftsmen, it is not unreasonable to assume that people would be able to devise other ways of avoidance. Some have been closed; others will almost certainly suggest themselves.
Here are a few examples. A firm of auctioneers had profits of over £400,000. The main participators in those profits to the tune of over £300,000 were four partners who themselves took incomes of £12,000, £30,000, £20,000 and £7,000 respectively, but gave to their family companies £135,000, £28,000, £39,000 and £39,000. The family companies handled their affairs in such a way as to pay certain directors fees and withhold other profits. The net position was that there was a tax loss of £62,000 in one year from a firm which had profits of over £400,000. That was by doing something which the law permitted to be done and which we are endeavouring to close.
A firm of chartered surveyors operated a similar system on profits of £64,000, again resulting in a loss of tax. I have been given a number of examples of auctioneering firms who arranged their affairs in a way similar to the one I originally indicated. Either by family companies or by arranging special loan facilities they also avoided thousands of pounds of taxation. A firm of architects paid no dividends during a period in which the profit was £24,000. Undistributed profit at the balance sheet date just before the period in question was £64,000, but this was reduced to £10,000 in the ensuing period by the redemption of £5,000 in preference shares at par and 450 ordinary £1 shares at a premium of £103. The company had an associated service company which was wound up with a balance of undistributed profits amounting to £30,000, which, of course, reached the shareholders in a form not chargeable to income tax.
One of the great difficulties in trying to explain this system is that the more you explain it the more ingenious and intricate and the more difficult to understand are the operations through which money moves in order to avoid tax. The tax saved can, of course, be quite substantial. As I have again and again pointed out, tax saved by one person means more tax paid by others to make up for what some people have been lucky enough to avoid.
Here is another ingenious device. A certain gentleman had a service agreement with a large concern so he decided to deprive himself of the service agreement by transferring the agreement to a company. He was managing director of the company and controlled the company in question through an associated company. One of the conditions of the transfer by the gentleman was that he would be employed by the company to manage the affairs of the large concern in question, which pays the management fee now to the company rather than directly to the person who was originally intended to benefit, but who, of course, will ultimately benefit. As a result of the transfer of the service agreement and some other complicated associated operations, the company in question now owes to that gentleman on a loan account secured by indentures, half a million pounds. It is not unreasonable to anticipate that the loan account will be paid off out of future profits of the company. These sums would be chargeable to tax in the hands of this lucky gentleman who has been able to arrange his affairs in this very intricate and legally commendable way even though the remaining body of taxpayers have to pick up the bill for his ingenuity in the long run.
A firm of chartered accountants has working to it a company which provides what are called "services" for the firm of chartered accountants. The service company in question in a recent year had disclosed profits of £150,000 and the unappropriated profit in the balance sheet was over £190,000. That was a few years ago. No subsequent accounts have been lodged but it has been revealed that the company ceased business in the meantime. A predecessor service company for the same accountancy firm ceased business some years ago and £146,000 was distributed by that company to the partners of the firm by way of a bonus issue and its subsequent redemption. £88,000 was apparently distributed later to the partners in the same firm in the same manner by another such company. I think it is not unreasonable to assume that the company which ceased business last year would be distributing £190,000 tax free by way of redemption of a bonus issue.
Again, an auctioneering company issued a large number of shares, nearly 30,000 shares, to a company which I will call S, for £20—29,000 shares for £20. The shares in company S were held by another company T. By a strange coincidence the directors of company T were also directors of the auctioneering company which issued 29,000 shares for £20 to a company which was owned by T. Three months after that, remembering now that the consideration paid for the shares was £20, the auctioneering company paid a dividend to Company S on the shares bought for £20, and it was nearly £80,000. In time, of course, company S paid it over to T. Company T then issued £50,000 bonus shares of £1 each and then by another strange coincidence it redeemed the shares the following day at par, avoiding tax.
I want to emphasise that all these operations are legitimate under existing law. We in government have considered that we have an obligation to terminate practices like that, otherwise you would get yourself into a position that some foreign countries have slipped into of allowing scandalous tax situations to develop causing as a result very considerable social, economic and, indeed, political unrest. Now, I do not know the number of people engaged in this practice. It does not matter. But, once an avoidance practice begins, word spreads about it and it can become extremely dangerous to leave it there. The scale of avoidance which I mentioned, all of which is legitimate, indicates the clear need to close the loophole. The number I have quoted is only a sample of the number I have available, but fewer than a 100 cases have been given to me. The Revenue Commissioners do not purport to have given me an exhaustive list. I want to emphasise this, in case anybody is in doubt about it, that I am not in a position to identify the firms in question. The Revenue Commissioners maintain complete confidence and quite contrary to what might be suspected the Minister for Finance knows nothing about the tax affairs of anybody in our community. That is the way it has always been and that is the way which I hope it always will be. Nevertheless, the Revenue Commissioners have a duty to inform any Minister for Finance about what may be happening under the law. In turn, if the Minister for Finance is asking for a significant change in the law he has a duty to indicate to people the need for the change. I think these examples would be regarded as evidence of the need for change. The undistributed profits in relation to some of the cases that I quoted here are far in excess of what might reasonably be required for the purpose of conducting at least some of the activities to which I refer. Clearly, the profits have been siphoned off and not reinvested in the firms in question. The fact speaks for itself. As a classicist in another House said recently, res ipsa loquitor. However, I would ask Senators to consider the proposition that I made, that I would consider introducing a provision in the 1977 Finance Bill to meet the points which have been made. By my announcing it now, saying that it would operate from 6th April, there would be no room for complaint if and when the change is made, that it contains an element of retrospection. But I issue the warning, because it is only fair that I should do so, that the consequences of making that change might be that some people would pay a greater amount in tax than they would pay if we leave the provisions in the Bill as they are. On the other hand, some people might pay less tax. The argument is that those who would pay a small amount of tax are those who legitimately require to retain a large proportion of their profits in order to meet the on-going expenses of business and the possible expansion expenses of business.
I should like to welcome the Minister's proposal, particularly in view of the fact that he rightly does not confine it to the surcharge on undistributed income of service companies under section 162. In addition to that, he would wish such an amending proposal to future finance legislation to embody trading companies, as I suggested yesterday in our amendment, because it would be altogether wrong to introduce an amendment on the lines suggested by the Minister only for service companies and not for trading companies. If one accepts the principle of the matter, and the principle is appropriate to section 162 in regard to service companies, and appropriate to section 101 in regard to trading companies, one should try to make the value judgment by the Revenue Commissioners in distinguishing between bona fide trading or service companies and trading or service companies that are engaged in tax avoidance practice. Again, I appreciate what the Minister stated. This requires going the whole way in introducing apportionment provisions. It may hurt people in the tax sense who are not being hurt under the situation as it is now. I would welcome that. I think it is important that, as far as possible, the taxation system in our community— indeed in any community seems to be a very valid principle—should lean towards incentive, enterprise, economic development, as well as engaging in the very legitimate business of collecting the necessary revenue for the State. We should lend our energies to devising an amendment along these lines which would be appropriate both to trading companies and to professional service companies. As far as this side of the House is concerned, we propose to do just that.
When the Minister was reading out the details of the particular cases it occurred to me that it is quite obvious that the Revenue Commissioners are already in a position to make a value judgment. Forgive me if I appear to be turning the point back on the Minister a bit because the plea has been made as to why the Revenue Commissioners should have this burden put on them of investigating each case selectively as to whether or not they are bona fide companies retaining profits for business requirements or simply tax avoidance companies. With the detail the Minister has available to him there, it is quite apparent that the Revenue Commissioners have certainly the matter very much at their fingertips. If they have that sort of information available in particular selected cases across the board they are in an excellent position to make the sort of value judgment of which I am talking. They have that type of data and we are a relatively small country. They know precisely the companies that are genuinely retaining profits for business requirements. I should like to welcome the Minister's proposal and I propose to take him up on it. I know it does involve the further apportionment aspect which can be the difficult aspect in regard to administration. There is no problem in devising the appropriate legislation, or appropriate amendment, to provide for apportionment. There is an administration problem involved and, as the Minister rightly said, some people may be caught who are not caught at the moment. I welcome that. Again, on the overall principle of drawing a clear line of distinction between bona fide and mala fide companies in this area. If that is the Minister's proposal, I welcome it and I propose to take him up on it.
The Minister is speaking to a very small House, but I have no hesitation in agreeing to his proposal. As a matter of fact the examples which he has just quoted, although they are perhaps few in number, are certainly striking in their significance. It is obvious that if he makes the proposed change in next year's Finance Bill, some of the firms who under the present adjustment would pay, say, 58 per cent tax would be paying 77 per cent tax in these cases, as they very justifiably should. The genuine close companies would be paying 8 per cent less, which certainly fits in with my line of thinking anyway. Obviously some people are going to be caught if you do make the change. I think that is only right and proper, because taxation, if it is going to be acceptable to a community, must be seen to be just. The steps the Minister has taken in this Corporation Tax Bill and other steps that have been taken in other legislation by the Government does indicate and demonstrate their anxiety to show the public that taxation has to be raised and that it is the Government's intention to raise it equitably. There is in section 162 a certain measure of injustice. The reasons given for deciding on this form of solution are clear enough, but for the longer term it would be better to put the matter in better shape. I would accept the Minister's proposal in this regard.
I am only concerned to see that a professional company—we can forget about the service company because it is only used in the case that they cannot incorporate—are not taxed any more than a trading company in relation to the money they need for their business. I follow the Minister completely. Obviously, I am not silencing myself for the future in commenting on the precise wording of the apportionment when we come to look at it as to whether it should impose more tax on one individual than on another and I should like to know the reasons for it. I know that code exists in the UK. I take the full implications of apportionment as being a just solution to the problem.
Senator Lenihan seemed to think that that scheme should extend—I think the Minister suggested that it would have to extend—to all trading companies. I am not convinced of that. If it proposed to treat professional companies differently from trading companies in the Bill, then, in principle, there is no reason why the Minister should feel obliged to depart from a principle, even if badly applied in this section. I thought the value of the particular method proposed in regard to trading companies generally was, that a judgment was made that by and large, they need it; there were factors making for distributions which were that the amendments made in the close companies situation take care of them; and that the surcharge element is a simple device which will lessen the burden of duty of the Revenue Commissioners. As a trial on the dog, I should like to see this new section being tried on professional companies. I wholly approve that the Minister should seek to catch within the net of taxation every one of the transactions he has described in which the money was not needed in the business. It was being enjoyed as non-taxable distributions by people who were carrying out legitimate tax avoidance operations. Once the Revenue became aware of them, it was correct that they should be stopped.
I would have thought that they are almost all caught by the provisions with regard to the close company. There only remains the situation of a professional company or a trading company deferring personal taxation by a retention. At a certain stage they will have built up such an investment position that they will be caught for the surcharge provisions. I am not afraid of apportionment. I simply want these professional companies to be treated no worse than trading companies. It would be a very expensive burden for the Revenue to take on the business of making these value judgments for all trading companies. I do not think trading companies would welcome it either. They would prefer this one. Professional companies, I imagine, would certainly welcome it. I certainly welcome it but I speak only for myself and, in particular, as a legislator. I believe the bona fide companies will welcome it.
What is the proposal? Is the Minister proposing to scrub this and state that notice has been given that, as from 6th April, there will be retrospectively applied the principle suggested which will give us a year to work it out?
April, 1976.
It will be retrospective, the Minister is telling the House now. That is fine as far as I am concerned.
If it was known now that the Minister proposed to introduce such legislation, it would put a stop to many potential avoiders and they would have fair notice.
Will the Minister be introducing such finance legislation?
I would not give an undertaking at the moment to do it because we might receive a flood of representations asking us to leave well enough alone. What I am doing is stating that I am prepared to consider doing this in the 1977 Finance Bill. If it is done, it will be operative from April, 1976. This is in response to representations which I have heard from people who would consider they would do better under such a system. In fairness, they have not had adequate regard from their own point of view to the inevitability of apportionment and, possibly, a higher rate of tax for some. Maybe they have. It has not come forth in the representations in a clear way. People will now have the better part of a year during which to consider their position and make any representations they wish.
The Minister might——
That would be unduly hasty. We have had representations on this. It only came in the beginning of February, although the Bill was out about two months before that. Obviously, people had a lot to think about. They had to consult with their advisers and the Christmas period intervened in the meantime. Because of the urgency of getting this legislation passed, if we had to put this through now, it would not give adequate consideration to it in relation to this year's Finance Bill. It would be just as unfair to rush that as it would be to try to make a change here. We will give plenty of time for discussion on the matter and I am sure I shall have another opportunity of drawing people's attention to it more directly.
Do we get rid of section 162 straight away?
No. I am not suggesting the deletion of section 162 now. The effects will be that section 162 will stand unless and until an amendment is made by the 1977 Finance Bill.
Question put and agreed to.
Sections 163 to 188, inclusive, agreed to.
First Schedule to Fifth Schedule, inclusive, agreed to.
Title agreed to.
Bill reported without recommendation and received for final consideration.
Question proposed: "That the Bill be returned to the Dáil."
Let me express my appreciation to the House for the manner in which it dealt with the Bill. It is extremely complex and difficult legislation which, notwithstanding the pressure of time, did receive quite an amount of detailed attention. I know the House would like me to express on its behalf our great appreciation as legislators to the Revenue Commissioners and the officers of the Department of Finance for the herculean work they put into this measure, not merely in the drafting of the actual Bill itself but since early in the 1970s when the first White Paper was published in 1972. There was a second White Paper in 1974. There are very few pieces of legislation which have been so well prepared and have been debated at such great length. I would like to thank everybody for their cooperation.
Would it be in order to say in relation to that how impressed one is by the fact that so much of the creative criticism of the Bill came from Government benches?
We would like to be associated with the remarks concerning the long and hard days that were put into this and other legislation, even though we may be the poorer for it.
Agreed.